Kaluga Power Sale Company (MCX:KLSB) Seems To Be Using A Lot Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Kaluga Power Sale Company Public Joint-Stock Company (MCX:KLSB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kaluga Power Sale Company

What Is Kaluga Power Sale Company's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Kaluga Power Sale Company had debt of ₽4.03b, up from ₽3.40b in one year. However, because it has a cash reserve of ₽501.6m, its net debt is less, at about ₽3.53b.

How Healthy Is Kaluga Power Sale Company's Balance Sheet?

We can see from the most recent balance sheet that Kaluga Power Sale Company had liabilities of ₽2.41b falling due within a year, and liabilities of ₽3.56b due beyond that. On the other hand, it had cash of ₽501.6m and ₽2.47b worth of receivables due within a year. So it has liabilities totalling ₽3.01b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₽741.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Kaluga Power Sale Company would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 1.3 times and a disturbingly high net debt to EBITDA ratio of 6.4 hit our confidence in Kaluga Power Sale Company like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Notably, Kaluga Power Sale Company's EBIT was pretty flat over the last year, which isn't ideal given the debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kaluga Power Sale Company's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Kaluga Power Sale Company recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Kaluga Power Sale Company's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. Taking into account all the aforementioned factors, it looks like Kaluga Power Sale Company has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Kaluga Power Sale Company you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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